Hundreds of jobs were lost yesterday as the economy was rocked by the worst unemployment figures for 16 years and a public service strike led to rubbish piling up in the streets.

The trail of jobs misery lengthened as two of Britain's biggest companies unveiled plans to cut hundreds of jobs.

Wolseley, the world's biggest distributor of plumbing materials, said it was planning to cut more jobs after shedding 6,000 in the past year, 700 of them in the UK and the Irish Republic.

HBOS, Britain's biggest mortgage lender, said 650 workers in its 3,000- employee business banking division would lose their jobs. There are also fears that at least 800 employees of Somerfield could be made redundant after the Co-operative Group yesterday announced that it had agreed to buy the troubled retailer.

Those setbacks came as the number of people claiming unemployment benefit soared by 15,500 in figures for June, the fastest rate since the last recession at the end of 1992, taking the total to 840,100. This came after the claimant count for May was revised up by 5,300 to 14,300.

The number of people out of work, calculated using the alternative ILO measure, rose by 12,000 in the three months to May to 1.62 million.

However, yesterday's figures from the Office for National Statistics do not reflect the 5,000 job losses announced by some of the UK's biggest housebuilders in the past month. Economists say the claimant count could exceed a million by the end of next year.

In the three months to May, 118,000 people were made redundant, up 10,000 on the three months to April.

The total of people in work also rose in the three months to May to a record 29.59 million, but the growth rates was the slowest in nine months.

There was a glimmer of hope for the Bank of England, which is battling the twin threats of soaring inflation and a slowing economy, as growth in average earnings fell by 0.1 of a point to 3.8 per cent in the three months to May. The Bank is concerned that if workers demand higher pay to cover the rising cost of food and fuel, this will further fuel inflation as companies raise prices to offset increased wage bills. Inflation hit a 15-year high of 3.8 per cent in June, official figures published earlier this week showed.

The threat of job losses was not enough to deter a 48-hour stoppage by local government workers, which hit council services, closed schools and evoked memories of the “winter of discontent” in 1978-79, which contributed to the fall of the last Labour government. There were warnings of a summer of strikes after the unions threatened further action if their 2.45 per cent pay-rise offer is not improved.

There are fears that rising unemployment could lead to more misery for homeowners as more people struggle to meet mortgage payments.

Spencer Dale, the Bank of England's new chief economist, yesterday told the Commons Treasury Committee that the Bank is facing its toughest economic test since being handed control of interest rates in 1997. He said: “The economic shocks that the UK economy currently faces are very difficult.”

Mr Dale followed other Bank officials in cooling expectation of rises in interest rates, which some in the City have been betting will happen by autumn. He said that while inflation was set to climb still further over the summer, he expected it to then gradually drop back to its 2 per cent target.

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